Monday, December 25, 2017

The rising transaction fees for Bitcoin have caused a major split, leaving the Bitcoin community divided into two camps: Bitcoin (BTC) and Bitcoin Cash (BCH). The two cryptocurrencies have unique ideas for how to reduce transaction fees: increase the blocksize, or build a new network on top of the blockchain.The Bitcoin Cash camp is making the blocksize bigger (from 1MB up to 8MB). This results in much lower transaction fees as compared to Bitcoin. However, the problem with the Bitcoin Cash approach is that it's only a matter of time until the blocksize needs to be increased again. So it's a bandaid solution. In the eventual limit of gigantic blocksizes (give it a few years), this means that the blocks will be so large that average person will no longer be able to validate the blockchain. The current blocksize is 1MB/6 minutes ~= 87GB/year ~=150GB total as of now. If you make it larger, then an average harddrive will no longer be able to download and validate the blockchain. If you extrapolate this pattern to include the types of transaction volumes that VISA handles, then eventually only one giant corporation (Google?) will have a harddrive big enough to validate the blockchain. So this scenario ends in: "trust Google, your money is safe" or perhaps people will switch to an alternative currency that they trust more. But then again, human beings have been known to engage in some moral hazard in exchange for short-term monetary gains. Nobody lives forever, so pushing out the problem to the future may be OK. Maybe a band-aid is good enough.The Bitcoin camp has taken a more creative approach than simply increasing the blocksize, and is building an entirely new transaction layer on top of the blockchain, that they call "The Lightning Network." The Lightning Network will allow people with Bitcoin to open a channel, and then do lots of little microtransactions outside of the blockchain, without having to pay a fee for every little transaction. It is only when they open and close a channel that the main Bitcoin blockchain learns about the final transaction, and so the fees are significantly reduced. This new system will allow for orders of magnitude more transactions, and therefore The Lightning Network is certainly not a band-aid solution. I would argue that The Lightning Network has the potential to be the killer app that the blockchain has been waiting for. The Lightning Network is in its infancy, and growth can be tracked here: https://explorer.acinq.coIn the future, you will be able open an account with a deposit of Bitcoin (with a small fee), and then make payments with zero fees to anyone else that is a member of The Lightning Network (instantly). This will enable the microtransactions that have been the promise of Bitcoin for the last 7 years. And no, you won't need to provide your driver's license, address, passport, date of birth, and mother's maiden name to open a Lightning account! There is even an app that lets you try the test version of the lightning network: https://play.google.com/store/apps/details?id=fr.acinq.eclair.walletNobody knows which camp will win (Bitcoin or Bitcoin Cash), but odds are currently ~80% in favor of Bitcoin and the Lightning network, and ~20% in favor of Bitcoin Cash and increased blocksize (https://www.coinexchange.io/market/BCH/BTC).As of the writing of this article, 1 BTC = $15,340 USD

Sunday, December 3, 2017

The promise of eliminating runaway inflation by irresponsible governments was one of the major reasons I became interested in Bitcoin. I always imagined that a country like Venezuela or Zimbabwe would be the first to switch away from their fiat currency and adopt Bitcoin. Today, Venezuela announced that they are trying to launch their own cryptocurrency, the Petro. I imagine President Maduro saying: "I have an idea: let's combine all the security risks of cryptocurrencies (theft, lost wallets, etc) with the monetary policy of the Government of Venezuela." To him I say: good luck with that!

I have an alternative. The Govt of Venezuela should buy large amounts of Bitcoin. If they put 15% of their resources into buying bitcoins and another 15% into mining bitcoins, they would become the first country to have BTC as their official currency. They have the power to make Bitcoin price skyrocket. They should do this in secret. If they delay the official announcement, then with the backing of a large government, Bitcoin price will skyrocket, and the government that buys at a low price will have made a direct profit on that investment after the official announcement. Venezuela could be a global version of the "the rich get richer." Furthermore, the investment in mining equipment that I am suggesting will be an investment into the future, as future Bitcoin mining will profit more from the transaction fee than they will from the raw currency creation. This would position Venezuela as a global processor of transactions, resulting in a net trade surplus due to skimming profits from international transactions. Ironically, the instability of the Bolivar makes it possible for Venezuela to profit immensely. They could turn their weakness into a strength. A country with a stable currency wouldn't have the political will to attempt such a bold (but in my opinion profitable) strategy.

Instead, what will probably happen is a bunch of Venezuelan politicians will flirt with some ideas and then possibly launch the next Dogecoin that has the same inflation problems as their existing currency and the Government of Venezuela will miss a golden opportunity.